day trading

File:GME.jpg weekly chart in 2021 where price squeezed over %1,000 in 2021 providing numerous day trading opportunities. ]]

Electronic communication networks (ECNs), large proprietary computer networks on which brokers can list a certain amount of securities to sell at a certain price (the asking price or "ask") or offer to buy a certain amount of securities at a certain price (the "bid"), first became a factor with the launch of Instinet in 1969. However, at first, they generally offered better pricing to large traders.{{Cite web | url=https://www.instinet.com/about-instinet/history.html | title=Instinet - A Nomura Company - History | website=www.instinet.com | access-date=2019-03-21 | archive-date=2019-03-21 | archive-url=https://web.archive.org/web/20190321094200/https://www.instinet.com/about-instinet/history.html | url-status=dead }}

{{Cn-span|text=The next important step in facilitating day trading|date=June 2025}} was the founding in 1971 of NASDAQ - a virtual stock exchange on which orders were transmitted electronically.{{Cite web |last=Terrell |first=Ellen |title=Research Guides: Wall Street and the Stock Exchanges: Historical Resources: Introduction |url=https://guides.loc.gov/wall-street-history/introduction |access-date=2025-06-11 |website=guides.loc.gov |language=en}}

After Black Monday (1987), the SEC adopted "Order Handling Rules" which required market makers to publish their best bid and ask on the NASDAQ.{{Cite web |url=https://www.cnbc.com/2010/09/13/man-vs-machine-how-the-crash-of-87-gave-birth-to-highfrequency-trading.html|title=Man Vs. Machine: How the Crash of '87 Gave Birth To High-Frequency Trading | first=Scott | last=Patterson | work=CNBC |date=September 13, 2010}}

In the 1980s, the NASDAQ introduced the Small Order Execution System (SOES).{{Cite web |last=Mackintosh |first=Phil |date=11 February 2021 |title=Nasdaq: 50 Years of Market Innovation |url=https://www.nasdaq.com/articles/nasdaq%3A-50-years-of-market-innovation-2021-02-11 |access-date=11 June 2025 |website=www.nasdaq.com}} The SOES became so popular among day traders that they were known as "SOES bandits". The SOES system ultimately led to trading facilitated by software instead of market makers via ECNs.{{cite news | url=https://www.bizjournals.com/portland/stories/1998/06/01/story2.html | title=Got $50,000 extra? Put it in day trading | first=Robert | last=Goldfield | work=American City Business Journals | date=May 31, 1998}}

The ability for individuals to day trade via electronic trading platforms coincided with the extreme bull market in technological issues from 1997 to early 2000, known as the dot-com bubble. From 1997 to 2000, the NASDAQ rose from 1,200 to 5,000. Many naive investors with little market experience made huge profits buying these stocks in the morning and selling them in the afternoon, at 400% margin rates. An unprecedented amount of personal investing occurred during the boom and stories of people quitting their jobs to day trade were common.{{cite magazine | url=http://content.time.com/time/magazine/article/0,9171,991726,00.html | title=Day Trading: It's a Brutal World | first=Daniel | last=Kadlec |magazine=Time |date=August 9, 1999 | url-access=subscription}}

In March 2000, this bubble burst, and many less-experienced day traders began to lose money as fast, or faster, than they had made during the buying frenzy. The NASDAQ crashed from 5000 back to 1200; many of the less-experienced traders went broke, although obviously it was possible to have made a fortune during that time by short selling or playing on volatility.{{cite news | url=https://www.bizjournals.com/pacific/stories/2002/02/11/focus3.html | title=It's back to day jobs for most Internet 'day traders' | first=David | last=Nakashima | work=American City Business Journals | date=February 11, 2002}}{{Cite web | url=https://www.investopedia.com/terms/d/dotcom-bubble.asp |title=Dotcom Bubble Definition | last=Hayes | first=Adam | work=Investopedia | date=June 25, 2019}}

Because of the nature of financial leverage and the rapid returns that are possible, day trading results can range from extremely profitable to extremely unprofitable; high-risk profile traders can generate either huge percentage returns or huge percentage losses.{{cite web | url=https://www.investopedia.com/articles/trading/05/011705.asp | title=Day Trading: An Introduction | first=JUSTIN | last=KUEPPER | publisher=Investopedia | date=August 11, 2020}}

Day trading is risky, and the U.S. Securities and Exchange Commission has made the following warnings to day traders:{{Cite web | url=https://www.sec.gov/reportspubs/investor-publications/investorpubsdaytipshtm.html | title=Day Trading: Your Dollars at Risk | publisher=U.S. Securities and Exchange Commission | date=April 20, 2005}}

• Be prepared to suffer severe financial losses
• Day traders do not "invest"
• Day trading is an extremely stressful and expensive full-time job
• Day traders depend heavily on borrowing money or buying stocks on margin
• Don't believe claims of easy profits
• Watch out for "hot tips" and "expert advice" from newsletters and websites catering to day traders
• Remember that "educational" seminars, classes, and books about day trading may not be objective
• Check out day trading firms with your state securities regulator

Most day traders lose money.{{cite news | url=https://www.thebalance.com/why-it-is-so-hard-to-make-consistent-money-day-trading-1031238 | title=The Difficulties of Making Money by Day Trading | first=CORY | last=MITCHELL | work=The Balance | date=February 12, 2020}}{{cite journal |last1=Barber |first1=Brad M. |last2=Lee |first2=Yi-Tsung |last3=Liu |first3=Yu-Jane |last4=Odean |first4=Terrance |title=The cross-section of speculator skill: Evidence from day trading |journal=Journal of Financial Markets |date=March 2014 |volume=18 |pages=1–24 |doi=10.1016/j.finmar.2013.05.006 |s2cid=7979781 |url=https://escholarship.org/uc/item/7k75v0qx }}{{cite journal |last1=Mahani |first1=Reza |last2=Bernhardt |first2=Dan |date=June 2007 |title=Financial Speculators' Underperformance: Learning, Self-Selection, and Endogenous Liquidity |journal=The Journal of Finance |volume=62 |issue=3 |pages=1313–1340 |doi=10.1111/j.1540-6261.2007.01237.x |jstor=4622302}}

A 2019 research paper analyzed the performance of individual day traders in the Brazilian equity futures market. Based on trading records from 2012 to 2017, it was concluded that day trading Brazilian equity futures is almost uniformly unprofitable:

{{Quote

|text=We show that it is virtually impossible for individuals to compete with HFTs and day trade for a living, contrary to what course providers claim. We observe all individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world, and who persisted for at least 300 days: 97% of them lost money, only 0.4% earned more than a bank teller (US$54 per day), and the top individual earned only US$310 per day with great risk (a standard deviation of US$2,560). We find no evidence of learning by day trading.{{cite SSRN |last1=Chague |first1=Fernando |last2=De-Losso |first2=Rodrigo |last3=Giovannetti |first3=Bruno Cara |title=Day trading for a living? |date=February 2020 |ssrn=3423101}}}}

An article in Forbes quoting someone from an educational trading website stated that "the success rate for day traders is estimated to be around only 10%, so ... 90% are losing money," adding "only 1% of [day] traders really make money."Godfrey, Neale (July 16, 2017). [https://www.forbes.com/sites/nealegodfrey/2017/07/16/day-trading-smart-or-stupid/?sh=38f6a3d71007 Day Trading: Smart Or Stupid?] Forbes.

Day trading requires a sound and rehearsed method to provide a statistical edge on each trade and should not be engaged on a whim.{{cite news | url=https://www.thebalancecareers.com/what-you-need-to-know-for-day-trading-1031072 | title=Weighing a Day Trading Career | first=CORY | last=MITCHELL | work=The Balance | date=July 22, 2020}}

The following are several basic trading strategies by which day traders attempt to make profits. In addition, some day traders also use contrarian investing strategies (more commonly seen in algorithmic trading) to trade specifically against irrational behavior from day traders using the approaches below. It is important for a trader to remain flexible and adjust techniques to match changing market conditions.{{cite web |url=https://www.traderplanet.com/adapting-to-change/ |title=Adapting To Change | work=SFO Magazine | date=October 2009}}

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Trend following, or momentum trading, is a strategy used in all trading time-frames, assumes that financial instruments which have been rising steadily will continue to rise, and vice versa with falling. Traders can profit by buying an instrument which has been rising, or short selling a falling one, in the expectation that the trend will continue. These traders use technical analysis to identify trends.{{cite news | url=https://money.usnews.com/investing/investing-101/articles/popular-day-trading-strategies-for-investors | title=4 Popular Day Trading Strategies for Investors | first=Wayne | last=Duggan | work=U.S. News & World Report | date=December 21, 2018}}

Szakmary and Lancaster (2015)Szakmary, A. C., & Lancaster, M. C. (2015). Trend-Following Trading Strategies in U.S. Stocks: A Revisit. Financial Review, 50(2), 221–255. https://doi.org/10.1111/fire.12065 validate the effectiveness of trend following in the U.S. stock market, demonstrating its potential for generating positive returns. Similarly, research by Blackstar Funds highlights rigorous applications of trend following in commodities, financial futures, and currencies, although its application to stock trading presented challenges.https://myhedgedfund.typepad.com/files/does_trendfollowing_work_on_stocks-2.pdf {{Bare URL PDF|date=August 2024}}

Contrarian investing is a market timing strategy used in all trading time-frames. It assumes that financial instruments that have been rising steadily will reverse and start to fall, and vice versa. The contrarian trader buys an instrument which has been falling, or short-sells a rising one, in the expectation that the trend will change.{{cite web | url=https://www.investopedia.com/terms/c/contrarian.asp | title=Contrarian | first=JAMES | last=CHEN | publisher=Investopedia | date=March 6, 2019}}

Range trading, or range-bound trading, is a trading style in which stocks are watched that have either been rising off a support price or falling off a resistance price. That is, every time the stock hits a high, it falls back to the low, and vice versa. Such a stock is said to be "trading in a range", which is the opposite of trending.{{cite web | url=https://www.investopedia.com/terms/t/tradingrange.asp | title=Trading Range | first=JAMES | last=CHEN | publisher=Investopedia | date=May 4, 2018}}

Scalping was originally referred to as spread trading. Scalping is a trading style where small price gaps created by the bid–ask spread are exploited by the speculator. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds.

Scalping highly liquid instruments for off-the-floor day traders involves taking quick profits while minimizing risk (loss exposure).{{Cite web |url=https://www.investopedia.com/articles/trading/05/scalping.asp |title=Scalping: Small Quick Profits Can Add Up |last=Norris |first=Emily |website=Investopedia | date=September 1, 2020}} It applies technical analysis concepts such as over/under-bought, support and resistance zones as well as trendline, trading channel to enter the market at key points and take quick profits from small moves. The basic idea of scalping is to exploit the inefficiency of the market when volatility increases and the trading range expands. Scalpers also use the 'fade' technique, when stock values suddenly rise, they short sell securities that seem overvalued.{{cite web | url=https://www.daytradetheworld.com/trading-blog/what-type-of-trader-are-you/ | title=Type of Day Trader | date=15 January 2021 | publisher=DayTradeTheWorld}}

Rebate trading is an equity trading style that uses ECN rebates as a primary source of profit and revenue. Most ECNs charge commissions to customers who want to have their orders filled immediately at the best prices available, but the ECNs pay commissions to buyers or sellers who "add liquidity" by placing limit orders that create "market-making" in a security. Rebate traders seek to make money from these rebates and will usually maximize their returns by trading low priced, high volume stocks. This enables them to trade more shares and contribute more liquidity with a set amount of capital, while limiting the risk that they will not be able to exit a position in the stock.{{cite news | url=https://www.businessinsider.com/henry-blodget-wall-streets-latest-trading-scam-that-costs-you-billions-2009-7 | title=The Latest Wall Street Trading Scam That Costs You Billions | first=Henry | last=Blodget | author-link=Henry Blodget | work=Business Insider | date=May 4, 2018}}

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Market-neutral trading is a strategy that is designed to mitigate risk in which a trader takes a long position in one security and a short position in another security that is related.

It is estimated that more than 75% of stock trades in United States are generated by algorithmic trading or high-frequency trading. The increased use of algorithms and quantitative techniques has led to more competition and smaller profits.{{cite news | first=Charles | last=Duhigg | url=https://www.nytimes.com/2006/11/23/business/worldbusiness/23iht-trading.3647885.html | title=Artificial intelligence applied heavily to picking stocks - Business - International Herald Tribune | work=The New York Times | date=November 23, 2006 | url-access=subscription}}

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{{Main|Bid–ask spread}}

The numerical difference between the bid and ask prices is referred to as the bid–ask spread.{{Cite web |last=Ødegaard |first=Bernt Arne |date=21 December 2023 |title=Trading costs - Spread measures |url=https://ba-odegaard.no/teach/notes/liquidity_estimators/spread/spread_lectures.pdf |access-date=11 June 2025 |website=ba-odegaard.no}} It can be viewed as an estimate of transaction costs.

The bid–ask spread is two sides of the same coin. The spread can be viewed as trading bonuses or costs according to different parties and different strategies. On one hand, traders who do NOT wish to queue their order, instead paying the market price, pay the spreads (costs). On the other hand, traders who wish to queue and wait for execution receive the spreads (bonuses). Some day trading strategies attempt to capture the spread as additional, or even the only, profits for successful trades.{{Cite web | url=https://www.thebalance.com/spread-bid-and-ask-spread-1031392 |title=Large Bid and Ask Spreads in Day Trading Explained |last=Milton |first=Adam |website=The Balance | date=July 29, 2020}}

Market data is necessary for day traders to be competitive. A real-time data feed requires paying fees to the respective stock exchanges, usually combined with the broker's charges; these fees are usually very low compared to the other costs of trading. The fees may be waived for promotional purposes or for customers meeting a minimum monthly volume of trades. Even a moderately active day trader can expect to meet these requirements, making the basic data feed essentially "free". In addition to the raw market data, some traders purchase more advanced data feeds that include historical data and features such as scanning large numbers of stocks in the live market for unusual activity. Complicated analysis and charting software are other popular additions. These types of systems can cost from tens to hundreds of dollars per month to access.{{cite web | url=https://www.investopedia.com/articles/active-trading/100714/vital-importance-choosing-right-day-trading-software.asp | title=Choosing the Right Day-Trading Software | first=SHOBHIT | last=SETH | publisher=Investopedia | date=February 25, 2018}}

• Everything bubble
• GameStop short squeeze
• Price action trading

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Category:Share trading